Chapter 14: Firms in Competitive Markets

1. In a competitive market, the actions of any single buyer or seller will

a. have a negligible impact on the market price.
b. adversely affect the profitability of more than one firm in the market.
c. cause a noticeable change in market production and price.
d. have little effect on market production, but ultimately change price.
ANSWER: a. have a negligible impact on the market price.

2. If marginal cost is less than marginal revenue

a. the firm must be experiencing losses.
b. the firm must be earning a profit.
c. the firm must be maximizing profits.
d. a profit-maximizing firm should increase the level of production.
ANSWER: d. a profit-maximizing firm should increase the level of production.

3. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.
b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of the above are correct.
ANSWER: c. Firms can exit and enter the market freely.

4. If a perfectly competitive firm currently produces where price is greater than marginal
cost it
a. will increase its profits by producing more.
b. will increase its profits by producing less.
c. is making positive economic profits.
d. is making negative economic profits.
ANSWER: a. will increase its profits by producing more.

5. When a perfectly competitive firm makes a decision to shut down, it is most likely that
a. price is below the minimum of average variable cost.
b. fixed costs exceed variable costs.
c. average fixed costs are rising.
d. marginal cost is above average variable cost.
ANSWER: a. price is below the minimum of average variable cost.

The figure depicts the cost structure of a profit-maximizing firm in a competitive market.
6. According to the figure, which line segment best reflects the long-run supply curve for
this firm?
a. AB
b. BC
c. CD
d. None of the above, the long-run supply curve requires knowledge of the
average variable cost structure.
ANSWER: c. CD

7. According to the figure, this firm will exit the market for any price on the line segment
a. CD.
b. AB.
c. CB.
d. None of the above is correct.
ANSWER: b. AB.

8. In a perfectly competitive market, the process of entry or exit ends when

a. firms are operating with excess capacity.
b. firms are making zero economic profit.
c. firms experience decreasing marginal revenue.
d. price is equal to marginal cost.
ANSWER: b. firms are making zero economic profit.

9. The exit of existing firms from a competitive market will

a. decrease market supply and increase market prices.
b. decrease market supply and decrease market prices.
c. increase market supply and increase market prices.
d. increase market supply and decrease market prices.
ANSWER: a. decrease market supply and increase market prices.

10. In economics, market power refers to the

 a. ability of a firm to influence the market price of the good it sells.
b. ability of the market system to efficiently allocate scare goods.
c. quality of a firm’s marketing efforts.
d. forces that operate the “invisible hand.”
ANSWER: a. ability of a firm to influence the market price of the good it sells.

11. In a competitive market individual firms take as given

a. the level of output they produce.
b. the price they receive for their output.
c. both the level of output they produce and the price they receive.
d. neither the level of output they produce nor the price they receive.
ANSWER: b. the price they receive for their output.

12. Other things the same, if a competitive firm doubles its output
a. average revenues fall.
b. price falls.
c. total revenues rise.
d. All of the above are correct.
ANSWER: c. total revenues rise.

13. In the short run a firm in a competitive market should

a. never shut down.
b. shut down only if price is less than average fixed cost.
c. shut down only if price is less than average total cost.
d. shut down only if price is less than average variable cost.
ANSWER: d. shut down only if price is less than average variable cost.

14. In the short run a firm should

a. never shut down.
b. shut down only if total revenues are less than total cost.
c. shut down only if total revenues are less than variable cost.
d. shut down only if total revenues are less than fixed cost.
ANSWER: c. shut down only if total revenues are less than variable cost.